A valuation algorithm for indifference prices in incomplete markets

Marek Musiela () and Thaleia Zariphopoulou ()

Finance and Stochastics, 2004, vol. 8, issue 3, 399-414

Abstract: A probabilistic iterative algorithm is constructed for indifference prices of claims in a multiperiod incomplete model. At each time step, a nonlinear pricing functional is applied that isolates and prices separately the two types of risk. It is represented solely in terms of risk aversion and the pricing measure, a martingale measure that preserves the conditional distribution of unhedged risks, given the hedgeable ones, from their historical counterparts. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Incomplete markets; indifference prices; nonlinear pricing algorithm (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1007/s00780-003-0117-0

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